August 9, 2014

Banks, businesses get ready for switch in credit cards

In a little more than a year, Americans are expected to switch out their current credit and debit cards for versions that are less vulnerable to fraud. While the change will improve security, it does come with a cost.

A big change is in the offing for credit and debit cards.

By October 2015, the country’s two largest card payment networks, Visa and MasterCard, want a system in place that replaces the magnetic stripe on the backs of credit and debit cards with a chip.

It’s a move that the companies and other financial industry officials said will reduce counterfeit card fraud and its impact on consumers and companies.

The changeover is likely to have minimal effect on consumers. The only effect it will have on them, financial industry officials said, is learning to “dip,” or insert, their card, instead of swiping it on a card reader.

The impact on businesses that accept debit and credit cards, as well as for the banks that issue the cards and process transactions, will be much greater.

One retail trade group said it understands the need for greater security. But it thinks the conversion will cost billions of dollars more than it should.

“We think it’s important,” said Mallory Duncan, senior vice president and general counsel for the National Retail Federation. “We’d like to see the money spent in a way that provides the best protection for us, our customers and the financial system at the most reasonable cost.”

The reason payment networks such as MasterCard are pushing the EMV Standard – EMV stands for Europay, MasterCard, Visa – is because the United States is behind the curve.

Most of the developed world already has switched to chip-based cards, and as a result criminals have turned their focus to the more vulnerable target – U.S. cards.

“From the point of view of payment security, the U.S. is a sitting duck,” said a Mercator Advisory Group white paper on EMV in 2012.

“It isn’t easy,” said MasterCard spokeswoman Beth Kitchener. “Migrations don’t happen overnight. It’s comparable to mandating that all U.S. drivers now need to drive on the left-hand side of the road. Think of all the necessary changes in training, infrastructure, signage and highway navigation.”

Kitchener said historically the U.S. experienced less fraud than other markets. But as those markets adopted EMV, instances of fraud dropped, and the people behind the fraud turned their attention to the U.S.

“The case can be made it’s now settling on our shores,” she said.

“We’ve already seen significant decreases in fraud in every market where EMV has been introduced, including Asia, the (United Kingdom) and Canada,” Kitchener added.

Tom Morrison, Intrust Bank division director who is overseeing the $4.3 billion-asset bank’s EMV conversion, thinks the switch to chip cards will reduce – but not eliminate – fraud.

“It’s very easy for the fraudsters to read the magstripe data,” Morrison said. “It’s very easy for them to create their own plastics (credit and debit cards).”

Morrison said Intrust began working on its EMV conversion in April 2013. The effort involves the redesign of about 300 different credit and debit cards to accommodate the fingernail-size, gold-colored computer chip that is placed on the front of the cards. He also said the process involves distributing new card readers and software to Intrust business customers that accept debit and card payments, as well as reconfiguring 105 ATMs.

He said he expects the bank to complete its conversion before the MasterCard and Visa deadline.

Carl Bradbury, director of consumer card products for Commerce Bank in Kansas City, Mo., said his bank has already issued about 25,000 chip cards to its customers, most of whom travel overseas and need a chip card to make purchases. Bradbury said he expects the $22.7 billion-asset bank to also complete its conversion in advance of the deadline.

He said the conversion to chip cards “is massively important to the industry.”

The chip on the card is a small computer, he said, that has a “dynamic” exchange of data that occurs using complex algorithms and encryption when it physically touches a chip inside the card reader.

“The advantages to issuers that come from migrating to chip-based cards are so great that you would be foolish not to get on board,” Bradbury said.

Duncan, of the retail federation, said his group estimates the cost will be tens of billions of dollars to the retail industry to convert to equipment and software that is compatible with the EMV Standard.

“The expense should be rational,” he said.

Intrust’s Morrison said there will be costs for merchants, because they will need to buy or rent equipment that can process chip card transactions. But he couldn’t specify how much the costs would be.

“It’s certainly our goal to make that as low a cost as possible,” he said.

Duncan also noted that the chip card won’t make much of an impact on preventing card fraud through an online transaction.

Morrison acknowledged that will remain an issue.

“There’s no good model for dipping your EMV card on a home computer,” he said.

Nancy Robinson, owner of Best of Times Card and Gift Shop, said she has been told by the representative of the company that provides her card processing equipment that the cost to convert won’t be expensive.

Robinson said she is supportive of the switch to chip cards.

“I am eager to do it,” she said. “I just think it’s ridiculous we haven’t done something sooner in the United States.”

Reach Jerry Siebenmark at 316-268-6576 or Follow him on Twitter: @jsiebenmark.

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